PDV Sweeny, Inc. v. Conocophillips Co.

• Decision Date: 01 September 2015
• Docket Number: 14-cv-5183 (AJN)
• Parties: PDV Sweeny, Inc., et al., Petitioners, v. ConocoPhillips Co., et al., Respondents.
• Court: U.S. District Court — Southern District of New York

PDV Sweeny, Inc., et al., Petitioners, v. ConocoPhillips Co., et al., Respondents.

14-cv-5183 (AJN)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 1, 2015

MEMORANDUM & ORDER

ALISON J. NATHAN, District Judge:

This case arises out of the Partial Award issued by an International Court of Arbitration panel (the "Panel") in a commercial dispute between former joint partners in an oil refining operation. As part of that operation, PDV Sweeny, Inc. ("PDV Sweeny") and PDV Texas, Inc. ("PDV Texas" and collectively with PDV Sweeny, the "Petitioners") acted as suppliers of Venezuelan crude oil. Respondents ConocoPhillips Company ("ConocoPhillips") and Sweeny Coker Investor Sub, LLC ("Sweeny Sub" and collectively with ConocoPhillips, the "Respondents") managed the facility which processed the crude oil into saleable products. Disagreements between the parties led to the triggering of a contract provision which automatically dissolved the joint venture. After the dissolution, the parties proceeded to arbitration before the Panel. Petitioners now move to vacate a portion of the Panel's ruling, while Respondents cross-petition for the Court to confirm, recognize, and enforce the award. See Dkt. No. 23. For the reasons below, Petitioners' petition is DENIED and Respondents' cross-petition is GRANTED.

I. BACKGROUND

A. Parties

This case principally concerns a joint venture between ConocoPhillips and Petroleos de Venezuela, S.A. ("PDVSA"). See Dkt. No. 28, Ex. 1 ("Partial Award") ¶ 1. The venture involved a number of subsidiaries and a complex web of agreements governing the supply and management of the oil refining operation. ConocoPhillips is a Delaware corporation and the parent of Sweeny Sub. Id. ¶ 13. PDVSA is a Venezuelan corporation wholly owned by the Venezuelan government. Id. ¶ 10. PDV Sweeny and PDV Texas are both indirectly wholly owned subsidiaries of PDVSA. Id. ¶¶ 8, 9. Two entities comprised the actual joint venture: Merey Sweeny, L.P., a Delaware limited partnership, and Sweeny Coker L.L.C. ("Sweeny Coker"), a Delaware limited liability corporation. Id. ¶ 16. PDV Sweeny and Sweeny Sub were limited partners in Merey Sweeny, L.P., with each entity possessing a 49.5 percent stake. Id. The remaining 1 percent interest in the partnership was controlled by Sweeny Coker, which itself was owned in equal part by PDV Texas and ConocoPhillips. Id.

B. The Joint Venture

In the late 1990s, ConocoPhillips, PDVSA, and their respective subsidiaries commenced a joint venture to design, construct, own, supply, and operate refining facilities within the broader confines of a large refining complex owned by ConocoPhillips in Texas. Id. ¶ 1. This was known as the "Sweeny Refinery." Id. ¶ 110. PDVSA and its affiliates supplied crude oil from Venezuela which was then processed by ConocoPhillips, which had greater refining and operational expertise than PDVSA. Id. ¶ 111. ConocoPhillips' interest in the arrangement was that it was able to secure a long-term, low-cost source of crude oil from Venezuela, which it wasthen able to convert into high-value end products. Id. The Sweeny Refinery and other ancillary facilities were owned by Merey Sweeny, L.P. Id. ¶ 114.

A number of agreements governed the relationship between the various parties to the joint venture. The obligation of PDVSA and its affiliates to supply ConocoPhillips and the Sweeny refinery with Venezuelan crude oil was governed by the Amended and Restated Crude Oil Supply Agreement (the "COSA"). See Pizzurro Decl., Ex. 3; Partial Award ¶ 119. The COSA, signed in 1999, is governed by Venezuelan law. See Partial Award ¶ 119. A related agreement was the Amended and Restated Supplemental Crude Oil Supply Agreement (the "SCOSA") between PDVSA and ConocoPhillips. The SCOSA, also governed by Venezuelan law, obligated PDVSA to assume the responsibility for supplying replacement crude oil, or pay seller damages, to ConocoPhillips in the event that one of its subsidiaries was prevented from supplying crude oil under the COSA due to the actions of the Venezuelan government. See Pizzurro Decl., Ex. 4; Partial Award ¶ 121.

C. The Transfer Agreement and the Call Option

The agreement most directly at issue in this case, however, is the Transfer Agreement. That agreement, governed by New York law, restricted the manner in which the parties could transfer joint venture interests. See Partial Award ¶ 118. The Transfer Agreement delineated two categories of joint venture interest transfers. The first, "authorized transfers," were transfers voluntarily made by the parties, which the Agreement subjected to certain restrictions. See Pizzurro Decl., Ex. 2, Art. III. The second category, "mandatory transfers," concerned certain compulsory transfers of joint venture assets. Id., Art. IV. Mandatory transfers acted as a remedy for ConocoPhillips in the event of PDVSA's breach. See Partial Award ¶ 118. This was referred to as the "Call Option," which could be triggered by one of several specifically identified "callevents." See Pizzurro Decl., Ex. 2, Art IV., Sec. 4.1. Two call events identified by the Transfer Agreement are relevant to this case. The first occurred if a PDVSA subsidiary failed to meet its obligation to supply crude oil under the COSA and that failure remained uncured for 90 days. Id. Second, and similarly, a call event occurred if PDVSA failed to make a payment obligation under the SCOSA and that failure remained uncured for 90 days. Id. Under either scenario, ConocoPhillips would have the right to exercise the Call Option, automatically allowing it to acquire the joint venture interest of PDVSA and its subsidiaries. See Partial Award ¶ 118.

In the event that one of the parties elected to exercise the Call Option, the Transfer Agreement provided two formulas for calculating the purchase price. Id. ¶ 165. The party electing to exercise the option held the prerogative to choose the formula. Id. Under the first formula, the purchase price was equal to half of eighty percent of the fair value of Merey Sweeny, L.P.¹ Id. The second formula set the purchase price equal to eighty percent of the sum of the party's capital contributions to the joint venture (plus any outstanding obligations of the party), minus all capital distributions from the joint venture to the party. Id.

Notably, exercise of the Call Option did not automatically trigger the dissolution of the COSA and the SCOSA, meaning that PDVSA and its affiliates would still be contractually required to supply ConocoPhillips with Venezuelan crude oil even if they lost their share of the joint venture. Id. ¶ 176. If PDVSA and its affiliates failed to supply crude oil to ConocoPhillips, the COSA and SCOCA both specified that they would be liable for a specific sum of seller damages. Id. ¶¶ 119.

D. The Dissolution of the Joint Venture

In January 2009, the PDVSA parties curtailed their supply of Venezuelan crude oil to ConocoPhillips due, allegedly, to cutbacks in the production and export of crude oil from Venezuela. Id. ¶¶ 124-126. ConocoPhillips claimed it was due seller damages under the COSA and SCOSA and the parties began a correspondence regarding the extent of PDVSA's liability. Id ¶¶ 127-129. On August 28, 2009, ConocoPhillips informed PDV Sweeny and PDV Texas that it was exercising the Call Option under the Transfer Agreement. Id. ¶ 136. ConocoPhillips elected to buy the PDVSA share of the joint venture according to the second contractual formula, which required ConocoPhillips to pay eighty percent of the PDVSA parties' capital contributions to the joint venture minus all capital distributions from the joint venture to the PDVSA parties. Id. ¶ 165. Because the PDVSA parties had received dividends from the joint venture totaling over $1.1 billion, far in excess of their capital contribution of approximately $270 million, this formula yielded a purchase price of zero dollars. Id. ¶ 168. In keeping with the Transfer Agreement, ConocoPhillips was also obligated to assume the PDVSA parties' outstanding debt obligations, which amounted to approximately $195 million. Id. ¶ 169. ConocoPhillips elected not to terminate the COSA or SCOSA and PDVSA and its affiliates resumed shipments of crude oil in October 2009. Id. ¶ 164.

E. The Arbitration

The PDVSA parties commenced arbitration under the ICC Rules of Arbitration on February 25, 2010. Id. ¶¶ 29-30. The arbitration concerned a range of disputes between the parties, only one of which is relevant to the present action. Namely, the Petitioners challenged the validity of the Call Option, alleging that it acted as an unenforceable penalty clause under New York contract law. Id. ¶ 2. Petitioners contended that the Call Option acted as a penaltybecause it resulted in a purchase price of zero dollars for their share of the joint venture, which the ConocoPhillips expert witness to the arbitration valued between $352 million and $540 million. Id. ¶¶ 172-177; Pizzurro Decl., Ex. 5. Accordingly, they theorized, its purpose was to compel their performance, rather than provide ConocoPhillips with adequate damages.

On April 14, 2014, the Panel announced its Partial Award. The Panel concluded that the Call Option was valid and enforceable under New York law and could not constitute an impermissible contractual penalty. Id. ¶¶ 178-187. The Panel further concluded that the Call Option acted as a valid termination provision for the joint venture, rather than as a liquidated damages or penalty clause. Id. ¶¶ 201-206.² Petitioners now move to vacate that portion of the Partial Award on the theory that it violates the public policy of New York and the United States. Respondents, in turn, cross-petition for confirmation of the Partial Award and Final Award pursuant to 9 U.S.C. § 9.

II. JURISDICTION

The arbitration at issue in this case involved parties from both the United States and Venezuela and is therefore subject to two international conventions concerning enforcement of arbitral...